An industrial and systems engineering life

Enterprise Analysis of Two Competing Corporations Part I – through P&L Statements

By Dhirendra Kumar Ph.D.

There are three major financial statements: P&L Statement, Balance Sheet and the Statement of Cash Flow. P&L Statement measures a company’s financial performance over a specific accounting period that indicates how revenue is transformed into net income. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities along with profit or loss incurred over the specified accounting period.

The concept of Balance Sheet and the enterprise analysis through Balance Sheets are presented in Part II, and the Cash Flow is available cash. So, the enterprise analysis through the P&L Statement is presented here.

The two major corporations in this analysis are General Electric Company (GE) is Fairfield, CT based corporation and the United Technologies Corporation (UTC) (UTX – is a symbol for UTC in NYSE) is Hartford, CT based corporation. Their key business summaries are as follows:

General Electric Company operates as a technology and financial services company worldwide. The company was founded in 1892 and is headquartered in Fairfield, Connecticut. The company’s major divisions:

The Energy Infrastructure – segment offers wind turbines; gas and steam turbines and generators; integrated gasification combined cycle systems; aircraft engine derivatives; nuclear reactors, fuel, and support services; oil and gas extraction and mining motors and control systems; aftermarket services; water treatment solutions; power conversion infrastructure technology and services; and integrated electrical equipment and systems. This segment also provides surface and subsea drilling and production systems, equipment for floating production platforms, compressors, turbines, turbo-expanders, high pressure reactors, and industrial power generation and auxiliary equipment, as well as pipeline integrity, measurement, inspection, monitoring, and radiation measurement solutions to the oil and gas industry.

Aviation – segment offers jet engines, turboprop and turbo shaft engines, related replacement parts, and aerospace systems and equipment for use in military and commercial aircraft; and maintenance, component repair, and overhaul services.

United Technologies Corporation provides technology products and services to the building systems and aerospace industries worldwide. It was founded in 1934 and is based in Hartford, Connecticut. The company’s major divisions:

Otis – segment designs, manufactures, sells, and installs passenger and freight elevators, escalators, and moving walkways, as well as provides modernization products to upgrade elevators and escalators, and maintenance and repair services.

Aerospace Systems – segment is a merger of Hamilton Sundstrand and Goodrich Company. This merger happened during the summer of 2012. Some of the key products of Goodrich are Landing gear, Lighting systems, Flight control actuation, etc. and Hamilton Sundstrand supplies aerospace products, including power generation, management and distribution, flight control, engine control, environmental control, and propeller systems, as well as auxiliary power units; industrial products, such as air compressors, metering pumps, and fluid handling equipment; and aftermarket services.

Sikorsky – segment manufactures military and commercial helicopters, as well as offers aftermarket helicopter and aircraft parts and services.

Both corporations are very heavily involved in designing, manufacturing, marketing and servicing high technology products, but GE is also involved in financial (capital lending) business. Five years of P&L data of General Electric (GE) and United Technologies (UTX) are presented in tables 1 and 2 respectively. Financial organizations generally present the latest year’s data first and then the subsequent years. For example, the presented data should start from the fiscal year (FY) 2011 and then the FY 2010 and so on, but the data are presented in the reverse order to make it a little bit easier for the reader to understand the data. In Part II, data are presented using the financial concept. Unfortunately, trend lines from the data cannot be developed due to deep recession period 2008-09. P&L Statement data are analyzed to get some insight understanding about these enterprises.

As you analyze the presented data in Tables 1 and 2, you will observe some key distinctions between UTX and GE as listed below:

Even though both the corporations are large corporations, but GE is about three times larger than UTX in revenue.

GE’s COGS ranges between 53 – 60 percent of revenue while UTX’s COGS ranges 71 – 74 percent of revenue. As you know that COGS is the manufacturing cost and GE’s good portion of revenue comes from the capital division that is why GE has a smaller percentage of revenue as COGS.

It looks like that GE has made a huge capital investment which is resulting in large depreciation in the range of 10 -13 Billions of USD a year while UTX’s depreciation is about 1.25 Billion of USD a year. As pointed out earlier that GE’s revenue is about three times the revenue of UTX, but capital depreciation is about nine times. So, GE is making huge capital investments. You have to go in much deeper details to find out more about the actual capital investments.

Five years (2007 – 11) average R&D expenditure in GE was 2.9 percent of Revenue while in UTX was 3.3 percent of Revenue which is about 10 percent higher than GE.

GE’s pretax income dropped very significantly during recession and has not reached to pre-recession period through fiscal year 2011, but UTX’s pretax income did not change significantly during recession and has already passed the pre-recession mark. It is clear from the data below:

2007 2008 2009 2010 2011

GE’s Pretax income as a % of Revenue 15.8 10.7 6.2 9.2 13.5

UTX’s Pretax income as a % of Revenue 11.8 11.7 11.0 12.0 13.1

Another very interesting data: Earnings Per Share (EPS): let’s analyze EPS (Diluted) which is earnings per share in USD.

2007 2008 2009 2010 2011

GE’s EPS (Diluted), Dollars 2.20 1.79 1.03 1.15 1.23

UTX’s EPS (Diluted), Dollars 4.27 4.91 4.12 4.74 5.49

As discussed earlier, GE’s pretax income was reduced very significantly during recession and has not fully recovered yet which is clearly reflecting in the EPS. UTX’s pretax income is up by 11 percent, but the EPS (Diluted) is up by almost 29 percent. While GE increased their outstanding shares from 10.22 billion to 10.62 billion while UTX reduced their outstanding shares from 988.8 Million to 906.8 millions. As company is increasing their common outstanding shares, they are diluting their income per share.

A high level analysis is presented here which shows the importance of P&L statement. If interested, perform a detailed analysis which will provide a lot more useful information for business planning.

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